|
|
|
|
||||
|
||||
The Relation between CEO Compensation and Past PerformanceRajiv D. BankerTemple University - Fox School of Business and Management; Temple University Masako N. DarroughCity University of New York - Baruch College - Stan Ross Department of Accountancy Rong HuangCity University of New York - Baruch College - Stan Ross Department of Accountancy Jose M. Plehn-DujowichTemple University - Fox School of Business July 18, 2012 The Accounting Review, Forthcoming Abstract: This study focuses on the relation between current compensation and past performance measures as signals of a CEO’s ability. We develop a simple two-period principal-agent model with moral hazard and adverse selection and test theoretical predictions using CEO compensation data from 1993-2006. Consistent with the predictions, we find that salary (bonus) is positively (negatively) associated with past performance for both continuing and newly-hired CEOs. We also find that while current salary is positively associated with future performance, current bonus is not. As the model suggests, salary is adjusted to meet the reservation utility and information rent, and is positively correlated over time to reflect ability. Bonus serves to address moral hazard and adverse selection by separating high-ability agents into riskier contracts. Our results indicate that it is important to disaggregate cash compensation into salary and bonus components to understand the dynamic interaction between incentives and performance.
Number of Pages in PDF File: 47 Keywords: executive compensation, past performance, salary, bonus, adverse selection, moral hazard JEL Classification: J33, M41 Accepted Paper SeriesDate posted: July 19, 2012Suggested CitationContact Information
|
|
||||||||||||||||||||||
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
FAQ
Terms of Use
Privacy Policy
Copyright
This page was processed by apollo2 in 0.469 seconds
